Last year, the President announced that he intended to expand access to the “Pay As You Earn” (PAYE) plan, an income-driven repayment plan that is significantly better than the widely-available Income-Based Repayment (IBR) plan, but is presently restricted to only the newest federal student loan borrowers. That means that most federal student loan borrowers currently in repayment cannot select the PAYE plan.
For months, the U.S. Dept. of Education has been engaged in what we call “negotiated rulemaking,” working with key stakeholders to flesh out the details of the expanded program and draft proposed regulations. Here are some key components of the program from the negotiating rulemaking committee:
Say Hello to “REPAYE”
The committee has come up with a name for the expanded PAYE program (because what we all need is yet another repayment plan with yet another name, right?). The program will be called “REPAYE.”
No “New Borrower” Restrictions
Per the President’s order, REPAYE will be available to all Direct federal student loan borrowers, regardless of whether they are a “new borrower” (that’s what presently limits eligibility for the current PAYE plan).
Monthly Payments under REPAYE
Under REPAYE, payments will be capped at 10% of a borrower’s discretionary income. This mirrors the current PAYE plan, and is better than the IBR plan, which caps payments at 15% of a borrower’s discretionary income.
Repayment Term and Loan Forgiveness
Here’s where things get interesting. Under REPAYE, for borrowers who only took out student loans for their undergraduate education, the repayment term is 20 years. Any remaining balance is forgiven at that time. For borrowers who took out student loans for their graduate education, the repayment term is 25 years, and any remaining balance is forgiven then. This differs from both the current PAYE plan and IBR, where the repayment terms are 20 years and 25 years, respectively, regardless of the educational program.
Cap on Interest Accrual
This is a big one. Under the IBR and PAYE plans in their present form, if your monthly payments do not cover interest, your overall loan balance can increase over time through a process called “negative amortization.” This can be a scary thing to experience. But under REPAYE, if your payments do not cover all of the accrued interest for that month, your interest accrual will be capped at 50% of the unpaid interest. This is not a perfect solution to negative amortization and does not eliminate it, but it will slow it down, so it’s something.
Married Borrowers Who File Taxes Separately
This is another big one. Under the current IBR and PAYE plans, a borrower who is married and files taxes separately from his or her spouse can base the monthly payment on the borrower’s income alone. This is a big deal for married couples where one spouse has significantly higher federal student loan debt than the other spouse, but much lower income. Under REPAYE, however, federal loan servicers will consider your joint marital income, regardless of whether you file taxes jointly or separately from your spouse. This may make REPAYE a non-starter for some married borrowers.
Public Service Loan Forgiveness
Many of you were worried about the President’s proposal to cap Public Service Loan Forgiveness (PSLF), and this was actually included in the President’s initial plans for the expanded PAYE program. However, under the new proposed regulations, not only is REPAYE an eligible repayment plan for PSLF, but there is no cap on PSLF. Capping PSLF could still happen through separate legislation, but right now, it’s not part of the REPAYE program.
Switching to REPAYE Appears to be Voluntary
For those of you who are presently repaying your loans under IBR or PAYE, nothing in the proposed regulations seems to require you to switch to REPAYE. For some borrowers, switching to REPAYE may make sense. For others, it may make more sense to stay on IBR or PAYE. It’s not cut-and-dry, unfortunately. As they say, the road through bureaucracy is paved with good intentions.
What Happens Next
Just to be clear, this is not the end. What we have here are proposed draft regulations. They definitely shed light on what REPAYE is going to look like, but it’s not quite law yet. Under federal law, the Dept. of Education must formally publish the proposed regulations, invite public comment, make any necessary changes, and then issue the final regulations. This whole process will likely take us at least through the Fall of 2015. So stay tuned.
Here’s the proposal if you want to check it out yourself (the draft regulations came out of the third negotiated rulemaking session).
